Friday, March 22, 2013

Pressure Mounts on Payday Lenders

To the growing list of adversaries of payday lenders add JPMorgan Chase. The mega-bank this week announced a series of moves intended to make it tougher for payday and other short-term lenders to decimate borrowers’ bank accounts.

Chase said it wants to protect its customers from situations where a payday or similar type of short-term lender presents and re-presents checks or ACH payments repeatedly and deceptively for collection. So, beginning June 1 the bank will only charge a customer one return item fee in a 30-day period if it believes the lender is not acting “in the spirit of their signed agreement with the customer.”

The bank also plans to start working with NACHA, a private sector group that writes and enforces rules for the ACH payment system, to ferret out short-term lenders who make excessive presentments.

Chase also said it plans to make it easier for consumers to challenge payments when abusive collections techniques are suspected.

When a consumer with a bank account takes out a loan with a payday lender that borrower agrees to allow the lender access to their accounts to collect repayments. The thinking is that there should be sufficient funds in the account once the borrower receives their next paycheck (which, of course, may be an ACH Direct Deposit). The reality is that seldom is the case. In fact, the average borrower ends up indebted for 5 months and pays $520 in finance charges on loans averaging $375, according to a new report from the Pew Charitable Trusts.

The Pew Trusts has a Safe Small-Dollar Loans Research Project, which has conducted extensive surveying and analysis. Last month the group released its second in a series of reports on payday lending in America,titled How Borrowers Choose & RepayPayday Loans. Here are some additional data points presented in that report.

  • Only 14% of recently surveyed borrowers can afford enough out of their monthly budgets to repay an average payday loan;
  • 41% needed cash infusions to pay off their payday loans; and
  • 27% had experienced bank account overdrafts atleast once due to payments collected by payday lenders.

The report doesn’t stop at its condemnation of non-banks, either, arguing that “although bank deposit advances are advertised as two-week products, average customers end up indebted for nearly half the year." That’s why the move by JPMorgan Chase – which is home to tens of millions of consumer checking accounts – is good PR. It also makes good business sense.

At least a dozen states and scores of municipalities have under consideration, or already have passed, laws aimed at curbing payday lending, and a group of ranking Senate Democrats has called on regulators to crack down on banks that do business with payday lenders.

Even before this latest plea from lawmakers the Comptroller of the Currency, a federal bank agency with supervisory authority over Chase, had been making it clear that it’s not keen on banks having close ties to payday lenders. In September the regulator rapped a bank in Florida on the knuckles, contending that its relationship with a payday lender could “raise heightened risks to the bank.”

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